Why Iran matters a little less to oil markets

European Union foreign policy chief Catherine Ashton and Iranian Foreign Minister Mohammad Javad Zarif before the start of nuclear talks at the United Nations in Geneva November 7, 2013.

SAN FRANCISCO (MarketWatch) — Politicians are smiling over the progress of talks between Iran and the West over the nation’s disputed nuclear program, but oil traders are not.

Already faced with a glut of crude supplies in the U.S. and slow growth in oil demand, traders worry that if there’s an agreement between Iran and world powers over the nuclear program, that will result in the removal of sanctions against Iran, which would ease restrictions on Iran’s oil exports.

That’s certainly a possible scenario, but prices aren’t likely to fall for as long or by as much as traders might think if trade opens up with Iran.

On Thursday in Geneva, Iran and world powers resumed talks that may ease world worries about Iran developing nuclear weapons and lifting at least some of the sanctions that have been imposed on the country by various governments and multinational groups over the past several years. An initial deal is expected as early as Friday, according to the Wall Street Journal.

“We are currently seeing the first real steps towards the possibility of Iran renewing relations with western powers,” said Sharath Sury, a lecturer in finance at San Diego State University, who is also a board member of Texas Coastal Energy Company.

Prices for crude — West Texas Intermediate
CLZ3, -3.12%
on the New York Mercantile Exchange and especially Brent on ICE Futures — took a hit Thursday as the latest round of talks began. Brent crude futures
LCOZ3, -1.62%
fell under $104 a barrel to mark their lowest close in four months.

That wasn’t the only reason for the price declines. The stronger dollar was a big part of it, too, but the talks and their implications for oil supply played a role.

If U.S. sanctions are lifted and Iran comes back on line, prices for Brent could fall by $4 a barrel, said Mark Williams, a former energy trading-floor executive who teaches finance at Boston University.

That doesn’t sound like much, especially considering some estimates of a price premium as high as $30 in 2012 when the European Union decided to impose an oil embargo on the country, and Iran was threatening to close the Strait of Hormuz, a key global oil transit hub.

Changing dynamics

What goes up, must come down. It just won’t happen as quickly for oil prices. And it will take a lot of work to bring back Iran’s oil production.

Sury said prices will indeed decline if Iran starts making material progress in its relations with western powers, but he doesn’t expect Brent prices to fall for long or for prices to hold below $90 for sustained period.

Any price impact is mitigated by both continued global quantitative easing as well as economic recovery and growth in the developing nations — notably China, “already a major consumer of Iranian oil,” he said.

It’ll also take time for Iran to ramp up oil production and re-establish relationships after decades of sanctions, and the market needs to consider the boom in U.S. production, analysts said.

The impact over the years of sanctions by the U.S., United Nations, European Union and others have taken a big toll on Iran’s ability to produce oil.

Total exports of crude oil, meanwhile, fell to around 1.5 million barrels per day in 2012 — a level they haven’t seen since 1986.

“If sanctions were lifted, it would certainly raise Iranian supplies but not only is this a big ‘if’, but there would also likely be a prolonged delay before any significant additional Iranian supplies actually hit the market,” said Matthew Parry, senior oil analyst at the International Energy Agency in Paris.

“Turning the clock back on sanctions will likely be a drawn-out process based on tangible diplomatic progress,” he said.

Maybe lifting the oil embargo on Iran won’t have any impact on the amount of crude the country is already providing to the world market.

After all, “they already are selling all the surplus crude oil they have available,” according to Charles Perry, chief executive officer at energy-consulting firm Perry Management.

“We have to remember that while the U.S. will honor these embargoes completely, a vast part of the world will not,” he said. “For a slight discount on the price of crude oil, there are too many countries that will readily ignore the U.N. embargoes and will take advantage of lower costs of oil.”

And how much oil Iran produces just doesn’t have as much importance as it did in the past.

Getty Images

A sign of improving relations: U.S. President Obama and Iran President Rouhani talked by phone in September.

“While the increase in demand from emerging large-population countries have driven oil prices higher based on fundamental factors, new sources of production from the U.S. and potentially other countries has reduced (though not removed) Iran’s influence on global energy markets,” said Edith Southammakosane, a London-based director and research analyst at ETF Securities.

“The world is a very different place,” than what it was during the 1973 oil crisis when Arab nations imposed an oil embargo that caused a surge in global oil prices, said Southammakosane.

Boston University’s Williams said that, at the time, the U.S. was “overly dependent on Middle-East oil.” Now “U.S. incremental oil production unleashed by new-found shale reserves help counterbalance the impact of the embargo on Iran” as well as supply disruptions caused by protests in Libya, he said.

The EIA expects U.S. crude-oil production to rise to an average 7.5 million barrels per day in 2013 and 8.5 million barrels per day in 2014, from 6.5 million barrels per day in 2012.

“The emergence of China and other large emerging markets as key sources of new demand, together with technological advances that have turned the U.S. into an energy supply powerhouse, have substantially changed the dynamics of the oil markets,” Southammakosane said.

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